Global Dairy Top 20 take M&A route to meet challenges

A recent survey by agribusiness banking specialist Rabobank of the
world’s largest dairy companies reveals that many are using mergers,
acquisitions and joint partnerships to sustain their growth in a very
challenging market.

Over the last 18 months, these dairy giants have battled challenging
conditions, with weak economies and supply constraints undermining sales growth
in key markets. Mergers and acquisitions are being seen as an attractive route
to growth and profitability. However, given the dearth of billion dollar deals,
the dairy giants will need to acquire or tie up with more companies to sustain
the same rates of growth in future.

According to Rabobank analyst Tim Hunt, giants such as Nestlé, Danone
and Lactalis top the list, reflecting their entrenched position in the market.
Companies such as Chinese giants Yili and Mengniu have outperformed their peers
in sheer growth terms – these two companies in particular saw their sales
expand by 14% and 20% respectively, with Yili entering the top 10 for the first
time ever.

Saputo went up to eighth place, in part due to several recent
acquisitions while Meiji and Morinaga slipped down the list largely due to the
sharp decline in the value of the Yen.

Stagnant sales volumes in most OECD dairy markets resulted in 2013 turning
into a challenging year for most of the world’s major dairy companies. With 124
dairy transactions in 2013, up from 111 in 2012 and the highest since 2007, acquisitions
have become a more attractive route to grow sales.

Joint ventures were also announced in 2013 by several dairy majors in an
effort to boost effectiveness in the market. Partnership agreements were signed
between Mengniu and Whitewave, COFCO and Danone, and Yili and Dairy Farmers of
America. Mengniu took a stake in China Modern Dairy to secure raw milk supply.
A further joint venture is pending between FrieslandCampina and Huishan.

However, there wasn’t a single billion dollar deal in the 12 months to
30 June 2014, despite the high number of acquisitions.

The challenging conditions in the global dairy
industry will continue; though underlying growth will pick up in the coming
years, many markets will not return to the rapid growth rates seen before 2008.
In this context, mergers, acquisitions and joint ventures will remain a key
avenue to growth and profitability for dairy companies.